High Court backs eBay in patent fight

Justices say the injunction did not have to be granted

WASHINGTON (MarketWatch) -- EBay Inc. scored a legal victory Monday when the U.S. Supreme Court ruled that a potentially costly injunction does not have to be automatically issued against the popular online auctioneer.

In a case closely watched by the business world, the justices unanimously ruled that a U.S. District Court had some leeway in deciding whether to issue an injunction against eBay for violating patents held by MercExchange LLC of Great Falls, Va.

The lawsuit concerns patents related to eBay's "buy it now" feature, which allows buyers to circumvent the auction process and buy a product immediately at a set price. Such purchases accounts for one-third of the total gross value of merchandise sold via eBay's Web site.

MercExchange sought an injunction against eBay after winning its original suit in 2003, but the district judge handling the case said the firm had sufficient means to seek monetary damages from eBay for past and future infringement.

Yet the Supreme Court said the district judge had misapplied a four-part legal test typically used to determine whether an injunction is warranted in patent disputes. The justices sent the case back to the lower court for another review, although a confident eBay predicted it would win again.

"The trial judge originally found in this case that money was sufficient, and denied an injunction," said Jay Monahan, a deputy general counsel at eBay. "We are confident that when the district court revisits this issue ... the result will be the same."

MercExchange, for its part, said it was "pleased" the Supreme Court ordered the district court to reconsider its request for an injunction and said it was "confident" of the outcome.

At the very least, the ruling buys eBay some time and might give it more leverage in its dispute with MercExchange. On Monday, EBay
EBAY, -0.87%
shares fell 26 cents to $31.23, nearly 35% below its 52-week high.

Bargaining tool

For now, the Supreme Court's decision is unlikely to have far-reaching effects on decades of long-standing practice in how courts settle patent disputes.

Yet at least four justices appeared to show sympathy to eBay's argument that MercExchange was unfairly taking advantage of existing law to extort unreasonable fees for the right to license its technology.

In the words of Justice Anthony Kennedy, some firms are using the threat of injunctions "as a bargaining tool to charge exorbitant fees." His concurring opinion was joined by John Paul Stevens, David Souter and Stephen Breyer.

Indeed, high-tech companies such as eBay have argued that so-called patent trolls are gaming the system and hurting technological development with the threat of injunctions. As a result, the eBay case turned into one of the most intensely scrutinized patent disputes in recent times.

The case took on added significance after Research In Motion Ltd., maker of the popular BlackBerry handheld e-mail device, was forced to pay a hefty $612 million to settle its long-running dispute with NTP Inc., a privately held firm whose sole assets were a handful of technology patents.

That decision intensified efforts by large high-tech firms to seek political or legal relief. On the other side are companies such as drug manufacturers that rely heavily on single patents to protect their investments in intellectual property. They object to any weakening of current patent law.

Failing the test

The MercExchange lawsuit, initiated in 2001, wound up at the Supreme Court after a federal appeals panel ruled that the district judge had erred in applying the four-part legal test. The appeals court said injunctions should be issued in most cases "absent exceptional circumstances."

The Supreme Court, however, said the appeals courts applied the four-part test too narrowly and vacated its decision as well. Justice Clarence Thomas, who wrote the decision, said the appeals court "erred in its categorical grant of such [injunctive] relief."

'This ruling does not resolve the ongoing patent-troll wars.'
Ken Adamo, Jones Day

MercExchange has sought an injunction to bar eBay from using its patented technology after the two companies failed to reach a licensing agreement.

If an injunction had been granted, eBay might have come under pressure to settle the case for a significantly higher sum than the company -- or its shareholders -- anticipated. In 2003 eBay was ordered to pay $25 million in damages.

Whether the eBay victory spurs the high court to alter decades of settled law involving patent disputes remains unclear. In its ruling, the court limited the immediate reach of its decision to the administration of the four-part test. Four court members, including Chief Justice John Roberts, expressed reluctance to tamper with the status quo.

"This ruling does not resolve the ongoing patent-troll wars," said lawyer Ken Adamo, a patent expert at the law firm Jones Day.

In a nod to eBay and its allies, however, four other justices suggested that past practices may not be adequate to address patent disputes arising in an era of rapid technological change.

Writing for the four, Kennedy said "an industry has developed" in which companies seek to use patents "not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees."

Those companies then use the threat of an injunction "as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent," Kennedy wrote.

While most patent infringements historically resulted in injunctions, the four justices said lower courts should exercise even more discretion in the future given the nature of modern technological development.

"When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest," Kennedy wrote.

The federal government supported MercExchange in the case. The U.S. Justice Department said injunctions help to force negotiations between the disputants and to figure out the market value of the invention that has been infringed.

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